AEROVIRONMENT, INC. The following is a discussion and analysis of our financial condition and the results of operations as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the "Consolidated Financial Statements" and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. In some cases, forward-looking statements can be identified by words such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" or similar expressions. Such forward-looking statements are based on current expectations, estimates and projections about our industry, our management's beliefs and assumptions made by our management. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in
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Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal
year ended
Unless required by law, we expressly disclaim any obligation to update publicly any forward-looking statements, whether as result of new information, future events or otherwise.
Critical Accounting Policies and Estimates
The following should be read in conjunction with the critical accounting
estimates presented in our Annual Report on Form 10-K for the fiscal year ended
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in
We recognize revenue in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 requires revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which we expect to be entitled in exchange for those goods or services.
Revenue for small unmanned aircraft systems ("UAS") product contracts with both
the
We review cost performance and estimates-to-complete at least quarterly and in
many cases more frequently. Adjustments to original estimates for a contract's
revenue, estimated costs at completion and estimated profit or loss are often
required as work progresses under a contract, as experience is gained and as
more information is obtained, even though the scope of work required under the
contract may not change, or if contract modifications occur. The impact of
revisions in estimate of completion for all types of contracts are recognized on
a cumulative catch-up basis in the period in which the revisions are made.
During the three months ended
For the three months endedAugust 1, 2020 andJuly 27, 2019 , favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands): Three Months Ended August 1, July 27, 2020 2019 Gross favorable adjustments$ 801 $ 283 Gross unfavorable adjustments (431) (274) Net favorable adjustments$ 370 $ 9
For the three months ended
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cumulative catch-up adjustments of
For the three months ended
Fiscal Periods
Due to our fixed year end date of
Results of Operations
The following tables set forth our results of operations for the period indicated (in thousands):
Three Months Ended
Three Months Ended
August 1, July 27,
2020 2019
Revenue $ 87,450 $ 86,911
Cost of sales: 52,039 45,639
Gross margin 35,411 41,272Selling, general and administrative 12,011 13,668
Research and development 11,103 8,709 Income from operations 12,297 18,895 Other income: Interest income, net 208 1,329 Other income, net 33 355
Income from continuing operations before income taxes 12,538 20,579 Provision for income taxes
1,207 2,133
Equity method investment loss, net of tax (1,288) (1,347)
Net income from continuing operations $ 10,043 $ 17,099
Revenue. Revenue for the three months ended
Cost of Sales. Cost of sales for the three months ended
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Gross Margin. Gross margin for the three months ended
Selling, General and Administrative. Selling, general and administrative
("SG&A") expense for the three months ended
Research and Development. R&D expense for the three months ended
Interest Income, net. Interest income, net for the three months ended
Other Income, net. Other income, net, for the three months ended
Provision for Income Taxes. Our effective income tax rate was 9.6% for the three
months ended
Equity Method Investment Loss, net of tax. Equity method investment loss, net of
tax for the three months ended
Backlog
Consistent with ASC 606, we define funded backlog as remaining performance
obligations under firm orders for which funding is currently appropriated to us
under a customer contract. As of
In addition to our funded backlog, we also had unfunded backlog of
Because of possible future changes in delivery schedules and/or cancellations of orders, backlog at any particular date is not necessarily representative of actual sales to be expected for any succeeding period, and actual sales for the year may
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not meet or exceed the backlog represented. Our backlog is typically subject to
large variations from quarter to quarter as existing contracts expire or are
renewed or new contracts are awarded. A majority of our contracts, specifically
our IDIQ contracts, do not currently obligate the
Liquidity and Capital Resources
We currently have no material cash commitments, except for normal recurring trade payables, accrued expenses and ongoing R&D costs, all of which we anticipate funding through our existing working capital and funds provided by operating activities. The majority of our purchase obligations are pursuant to funded contractual arrangements with our customers. We believe that our existing cash, cash equivalents, cash provided by operating activities and other financing sources will be sufficient to meet our anticipated working capital and capital expenditure requirements during the next twelve months. There can be no assurance, however, that our business will continue to generate cash flow at current levels. If we are unable to generate sufficient cash flow from operations, then we may be required to sell assets, reduce capital expenditures or obtain additional financing. We anticipate that existing sources of liquidity and cash flows from operations will be sufficient to satisfy our cash needs for the foreseeable future.
Our primary liquidity needs are for financing working capital, investing in capital expenditures, supporting product development efforts, introducing new products and enhancing existing products, and marketing acceptance and adoption of our products and services. Our future capital requirements, to a certain extent, are also subject to general conditions in or affecting the defense industry and are subject to general economic, political, financial, competitive, legislative and regulatory factors that are beyond our control. Moreover, to the extent that existing cash, cash equivalents, cash from operations, and cash from short term borrowing are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. In addition, we may also need to seek additional equity funding or debt financing if we become a party to any agreement or letter of intent for potential investments in, or acquisitions of, businesses, services or technologies.
Our working capital requirements vary by contract type. On cost-plus-fee programs, we typically bill our incurred costs and fees monthly as work progresses, and therefore working capital investment is minimal. On fixed-price contracts, we typically are paid as we deliver products, and working capital is needed to fund labor and expenses incurred during the lead time from contract award until contract deliveries begin.
To date, COVID-19 has not had a significant impact on our liquidity, cash flows
or capital resources. However, the continued spread of COVID-19 has led to
disruption and volatility in the global capital markets, which, depending on
future developments, could impact our capital resources and liquidity in the
future. In consideration of the impact of the COVID-19 pandemic, we continue to
hold a significant portion of our investments in cash and cash equivalents and
Although not material in value alone or in aggregate, during the three months
ended
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Cash Flows
The following table provides our cash flow data for the three months ended
Three Months Ended
August 1 , July 27,
2020 2019
(Unaudited)
Net cash provided by operating activities
Cash Provided by Operating Activities. Net cash provided by operating activities
for the three months ended
Cash Used in Investing Activities. Net cash used in investing activities
increased by
Cash Used in Financing Activities. Net cash used in financing activities
increased by
Contractual Obligations
During the three months ended
Off-Balance Sheet Arrangements
As of
Inflation
Our operations have not been, and we do not expect them to be, materially affected by inflation. Historically, we have been successful in adjusting prices to our customers to reflect changes in our material and labor costs.
New Accounting Standards
Please refer to Note 1-Organization and Significant Accounting Policies to our
unaudited consolidated financial statements in Part I, Item 1 of this Quarterly
Report on Form 10-Q for a discussion of new accounting pronouncements and
accounting pronouncements adopted during the three months ended
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